Manager Monday: Altimeter Capital Management
Brad Gerstner and Altimeter are an example of how expertise in a particular field can be leveraged to generate alpha.
Brad Gerstner has been busy.
A former partner at PAR Capital Management, a firm ranking consistently in our Top Stock Pickers reports, Gerstner has made a big name for himself picking up-and-coming travel technology start-ups like Kayak, HotelTonight, and Priceline.com.
A profile in Bloomberg Business describes Gerstner as, “an amateur pilot who’s logged about 400 hours above New England … and gone heli-skiing with Expedia founder and Zillow co-founder Rich Barton,” with whom he also “met up [with] for Burning Man, the famously libidinous temporary community assemblage in the Nevada desert, for a week of self-expression and survivalist living.”
An Altimeter is an instrument that helps a pilot determine the altitude of an aircraft. It makes sense, then, that Gerstner would go on to form the aptly named Altimeter Capital Management, whose hedge fund arm, according to their website, focuses on the internet, software, travel, and consumer sectors.
While the Altimeter venture capital arm has made news for some serious start-up investments, and even opened an office in Silicon Valley for that explicit purpose, the hedge fund seems to have flown under the radar. Our analysis proves unequivocally that Altimeter Capital Management is a serious name in marketable alternative investments, and one that will no doubt pique the interest of investors.
About Our Data
Everything mentioned in this post is sourced exclusively from public data, including the manager’s profile, simulated performance and all other analysis and commentary. The data used here omits the short side, non-equity securities, many non-US securities and all non-public information such as actual fund performance. To simulate performance and determine portfolio attributes such as liquidity, we combine public holdings data with market and pricing data and make simple assumptions.
Altimeter Capital Management’s Performance
Since January 2012, the date of their first 13F filing, the fund has earned its investors a massive 305% return on the long side through October month-end. That’s a 226% and 249% outperformance over the S&P 500 and MSCI World, respectively.
In a previous report, “How AUM Growth Degrades Manager Portfolios,” by my colleague Stan Altshuller, we detailed the three levers managers can pull to cope with growth. They are:
- Increasing the position count and investing in new ideas
- Moving their assets up the market capitalization spectrum
- Allowing a decline in liquidity
While Gerstner may be high-flying in his personal antics, he’s a level-headed investment manager that seems to do his due diligence for investors. Let’s see which lever he pulls.
How Altimeter Dealt with Increasing AUM
Since the earliest filings date, Gerstner has decreased his number of positions from 36 to 19, creating a much more concentrated fund profile. Surprising, and not exactly what we’d expect to see as a response in the face of increasing AUM.
In fact, from the chart below, we can see that his top ten names comprise over 90% of his total portfolio. While that number dropped a bit through 2014, at the lowest point his top ten names still made up nearly 80% of his portfolio.
So he hasn’t given up his concentration. But how about liquidity? His 30-day liquidity percentage, or the amount of the fund Gerstner can liquidate within a 30-day window, has remained consistent. Altimeter has operated since its inception as a consistently liquid fund. Since the latest filings, 99% of the portfolio is liquid in 30 days, which is remarkable considering the increase in AUM.
Finally, we come to market capitalization. At the fund’s inception, Gerstner placed the vast majority, over 80%, of his assets in mid-cap names. Today, Altimeter has almost the same percentage, 79%, in large-cap names. You can track the change yourself in the graph below:
And here, where we can see the fund’s median market capitalization moving steadily up the spectrum:
What’s really interesting about this metric is that while the average market capitalization of his positions is increasing, he’s managed to do it without altering the composition of his top names. For example, here are the top three positions in 2012 versus 2015:
While the portfolio experienced a shift from mid to large caps, it was mostly organic. This is due to the underlying names growing and not a conscious style shift. Now that we know how Gerstner skillfully dealt with the AUM increase brought on by his own outperformance, let’s take a look under the hood and discover how he did all that outperforming in the first place.
How Altimeter Outperforms
We’ve written a substantial amount of research on the few common ways managers succeed, and the dizzying number of ways they fail. Through this research, we’ve discovered that two of the classic, skill-based ways managers outperform their peers is through position sizing decisions and security selection ability. Gerstner is no exception here.
First, it must be said that, in this Manager Monday, we’re dealing with an extraordinarily specialized manager. There’s a reason the above-quoted Bloomberg profile of Gerstner opens with his passion for flying, traveling, and general daredevilry—he actively invests in what he loves.
This has lent him, and Altimeter, an incredible advantage over traditional investment managers. Gerstner is an absolute expert in his field. However, as the Bloomberg profile is quick to point out, he’s less proven outside of travel technology: “One of his first private investments was in Kayak, the kind of travel-deals aggregation website he’s championed for years. The deal paid off but hasn’t helped the perception that his expertise is narrow.”
With that in mind, let’s dig into the numbers.
Altimeter Capital Management and Stock Picking
For starters, let’s take a good look at all nineteen positions Gerstner filed in Q3 of 2015:
Of these 19 positions, ten can be siloed into travel or travel technology. These ten comprise 86.6% of his total portfolio, leaving the remaining 13.4% in various software companies, and .76% in Amazon because, well, it’s Amazon, and everyone has some.
Since we already know he’s an expert in his field, his stock picks should prove that, and they do. Looking at the fund’s Attribution Heatmap proves unequivocally that he’s a phenomenal stock picker. Of his biggest positions, every single one is a winner, and in fact, we don’t see a detractor until Tableau Software Inc, his biggest loser. His only losing positions for the year are Tableau, Demandware, and Box – interestingly all software.
This is classic example of sticking to what you know. In the last four years, Gerstner kept a similar dispersion of funds in Industrials and Consumer Discretionary, with a sliver of Information Technology.
And taking a look at his Win/Loss ratio in these sectors yields some not-so-surprising results. Consistent with his experience, he’s an incredible stock picker in Consumer Discretionary and Industrials, and while his picking in Information Technology leans positive, the result isn’t nearly as compelling as when he sticks to his expertise. The chart below shows that the average winning trade in Industrials makes 9x the P&L that the average losing trade costs. Not so in IT, where the win/loss is neutral.
Gerstner has yet to demonstrate consistent alpha generation in more traditional IT names, but that may be an area of tangential growth for the firm versus the allocation of that capital into his proven track record of selecting travel tech securities. Before we can make that assumption, we’ll need to see how he fares with sizing up his bets.
Altimeter Capital Management and Position Sizing
As we mentioned before, position-sizing skill is an ability that separates the best managers from the mediocre, especially in a hedge fund landscape where ideas differentiation can be hard to come by. An unskilled manager can detract a significant amount of value from his or her portfolio by betting big or small at inopportune times. This inherent ability to read the market and know when to size up or down is one of the inherent skills that’s almost impossible to teach, but with the right tools, is easy to identify.
It turns out that Gerstner has it in spades.
Over the lifetime of the fund, Gerstner has added an additional 82% outperformance through position sizing against an equally weighted portfolio.
In the following example, you can see Gerstner sizing up his position in United Continental Holdings as soon as the price dropped in September, and riding the price back up for a nice profit:
Here, he increased his position size from 19.64% of his portfolio in August to 31.56% of his portfolio in September.
So back to that earlier criticism of Gerstner as “unproven” outside of travel technology. While that may be true, over the lifetime of his fund, Gerstner has proved that he has the skills of a top-tier investment manager, providing massive returns to his investors. Through analytics, we’ve proven that he is in fact an expert in his field.
While it remains to be seen how traditional software positions will fare in the portfolio, he’s a phenomenal stock picker who allocates aggressively to his core competence. When he does, Altimeter earns its name, and his investors are flying along right beside him.
What makes a successful hedge fund manager? We believe that studying performance alone does not adequately answer the question. By looking at thousands of active manager portfolios, we peek under the hood of managers’ investment process and recognize patterns that lead managers to consistent outperformance. These patterns can be viewed as investment skill, or managers’ ability to generate alpha through certain repeatable methods.
In this article we use public ownership data and the Novus Alpha platform to evaluate three very distinct money managers. The three case studies aim to identify the driver of these managers’ success: investment skill.
What’s in the report?
- Analysis of a top long-short equity fund
- Analysis of a top sector specialist
- Analysis of a top long-only manager